Crowdfunding Set to Explode with Passage of Entrepreneur Access to Capital Act

Nearly $100 million in seed money was pledged last year to startups and creative projects through the crowdfunding platform Kickstarter.com--just one of many websites now dedicated to matching projects with people who have some means and desire to support them. What Kickstarter donors got in return were things like "thank you" credits in films, DVDs, tee-shirts, flowers, cookies, and concert tickets. Federal and state securities laws prohibit these startup operations from offering equity to their investors. The good feeling that comes from supporting innovation seems to be the main reward for many people who hand over cash to support the schemes of others online.

But what if there was potential for a financial return on these crowdsourced investments? If startups could offer stock to their small-stake supporters, some (including Amy Cortese in this New York Times Op-Ed) predict that the practice of crowdfunding would explode, opening up far more resources to entrepreneurs, spurring innovation, and creating jobs.

That's exactly what the Entrepreneur Access to Capital Act (HR 2930) aims to achieve. The bill, which Forbes contributor Scott Edward Walker explained in detail here last month, has the support of President Obama and was passed by an overwhelming majority in the House in November, but has been hung up in the Senate ever since.

Portfolio.com and Reuters reported on Tuesday that Senate majority leader Harry Reid announced plans to push the legislation forward. According to Reuters, the bill would:

Create a regulatory framework to let private businesses use crowdfunding ... to raise up to $2 million annually from investors pledging no more than $10,000, or 10 percent of their annual income.

Though a report in the Wall Street Journal earlier this month suggested that the U.S. Securities and Exchange Commission might stand in the way of the bill, Reuters reported yesterday that:

The SEC is considering updating its own rules to foster capital formation. Earlier this month, an SEC advisory panel urged the agency to relax outdated rules that trigger public financial reporting for companies, but it stopped short of backing crowdfunding, citing concerns about investor protection.

In a TechCrunch interview at the Techonomy conference last November, AOL founder Steve Case pointed out the irony in current rules that limit investing to the accredited, noting that you don't have to be accredited to go to Las Vegas and lose $10,000 at a table in an hour.

The S.E.C. must balance its dual mission of facilitating investment and protecting investors, and as we all know, snake-oil salesmen are alive and well on the Internet. Furthermore, Wall Street banks are likely to fight any efforts to encourage crowdfunding because it cuts them out of the equation. But the potential rewards outweigh the risks. With such sums, the hazard to any single investor is limited. And information is more freely available today than in the 1930s, when the regulations were written.